Rupee Decline Hurts Even Those Who Should Benefit

Analysts say that the rupee’s new low could be a serious threat to the financial health of corporate India.

As the rupee loses value against the U.S. dollar, executives at Indian companies that earn in dollars should be rejoicing, right?

Wrong.

In fact, executives at these companies are as dumbstruck by the rupee’s sharp losses as the rest of corporate India.

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On Thursday, the rupee hit an all-time low of 56.37 for one U.S. dollar, though it bounced back by Friday afternoon to trade at 55.64 rupees. Still, its value has fallen 23% in the last one year, with a large part of the losses coming in recent weeks as global investors dumped currencies of emerging countries like India to buy U.S. dollars instead.

The rupee also has been hurt by India’s weakening macro-economic environment, including large current and fiscal deficits and muted foreign capital inflows.

Analysts say that the rupee’s new low levels could be a serious threat to the financial health of corporate India, particularly those companies that import goods or have taken loans abroad.

Over the next few months, we could see “corporate earnings collapsing like a pack of cards,” says Deven Choksey, managing director at Mumbai brokerage firm K.R. Choksey Shares and Securities.

Even chief financial officers of companies that earn money abroad are not exactly jumping with joy. These include companies which export their services and goods, such as information technology companies Infosys Ltd. and Tata Consultancy Services Ltd., and pharma companies like Lupin Ltd. and Ranbaxy Laboratories Ltd.

Their foreign earnings are worth more in rupees now, but given the speed with which the rupee has lost value, they could still end up with notional losses on their balance sheets.

Here’s why: To protect their earnings from the ups and down of the currency, these companies typically hedge their foreign currency exposures.

They typically use hedging instruments like a forward contract, which basically allows them to sell the foreign currency received as income from overseas operations at an agreed exchange rate at a future date.

For example, assume an exporter expects to receive $100 million in one month’s time. Suppose today the exchange rate is 55 rupees for one U.S. dollar. The exporter has to guess what the rate will be in one month’s time, to try and lock in the best possible exchange rate today. Let’s assume he enters into a forward contract now to sell the $100 million income a month later at 58 rupees per dollar. In other words, the exporter gets a promise that at the end of the month, he will receive 58 rupees for every dollar sold, even if the rupee has fallen to, say, 52 rupees by then.

But what if a month later the exchange rate is 60 rupees for one U.S. dollar? The exporter will still only get 58 rupees, and thus have to book a hedging loss for selling his dollars at a discount of two rupees to the spot rate then.

This has been a big issue for exporters lately. The rupee has fallen much more and much faster than they had predicted. Rupee volatility leads to “paralysis because we don’t know what the bottom is,” said Ramesh Swaminathan, president of finance and planning at drug-maker Lupin Ltd., in a recent interview.

To be sure, the problems are much worse for a whole host of other companies.

The worst-hit will be companies that import components and other raw materials for products they manufacture in India. These include auto-makers, and producers of consumer durables like air-conditioners and televisions, or sellers of imported electronic gadgets like speakers and headphones.

These companies are already facing the prospect of shrinking domestic sales as inflation has been high in India, and now they will have to pay more rupees for their imports.

Foreign car makers Toyota Motor Corp. and Honda Motor Co. have already voiced concerns that imported parts could turn costlier and Toyota has said it may raise prices of its cars and sport-utility vehicles.

Meanwhile, infrastructure companies which build roads, highways and airports could find it difficult to raise money overseas to pay their projects as foreign investors may be deterred by India’s volatile currency.

The weak rupee is also likely to stoke inflation, reducing the room for the central bank to further cut interest rates. High rates have already made it very expensive for companies to take loans from banks. And currency weakness could hurt the financial performance of Indian refiners and oil marketing companies as it makes oil imports more expensive. Though oil companies raised gasoline prices by 11.5% Wednesday, they may find it hard to pass on the entire increase in costs, particularly on other fuels like diesel, to consumers in India.

Another set of companies which will be hurt are those who borrowed money abroad some years ago to benefit from low overseas interest rates. At that time, the rupee was trading at around 40 to 42 rupees for one U.S. dollar. Debt now coming due is much costlier in rupee terms than those companies had anticipated. Last week, wind-power company Suzlon Energy asked for additional time to repay $359 million worth of foreign debt due to be repaid in mid-June.

These companies who have borrowed abroad are sitting on a “time bomb,” says Jagannadham Thunuguntla, head of research at Delhi-based SMC Global Securities Ltd.

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